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To better understand how changes in domestic and international petroleum products markets have affected prices, GAO was asked to evaluate trends in (1) the international trade of petroleum products, (2) refining capacity and intensity of refining capacity use internationally and in the United States, (3) international and domestic crude oil and petroleum product inventories, and (4) domestic petroleum supply infrastructure. To address these objectives, we reviewed numerous studies, evaluated data, and spoke to many industry officials and experts and agency officials.

International trade in petroleum products has expanded over the past two decades, making markets for gasoline and other petroleum products increasingly global in nature. Recent plans and mandates in the United States and other countries to greatly expand the use of biofuels blended with petroleum products--for example, ethanol blended with gasoline and biodiesel blended with petroleum diesel--may have the unintended effect of reducing opportunities for trade because blending different levels of biofuels with petroleum blending stocks will require changes to these blending stocks and thereby reduce their fungibility. For most of the past 25 years, there has been excess refining capacity globally, but this excess has shrunk considerably in recent years as demand has increased faster than capacity growth, causing refineries to run closer to their production capacity, and contributing to recent increases in petroleum product prices, price volatility, and refining profits. However, experts say it is unclear whether or for how long the current market tightness will continue, in part because of uncertainties about how much additional refining capacity will actually be built in the face of rising construction costs and initiatives that may reduce future demand for petroleum products such as through the blending of large volumes of biofuels into the transportation fuels markets. When measured as average days of consumption, inventories of petroleum products and crude oil in the United States indicate a general decline over the past 20 years. A number of factors have contributed to this decrease in the United States, including reductions in crude oil production and the number of refineries as well as efforts to reduce inventory holding costs by applying advances in technology. Lower operating costs associated with lower inventories may have translated into lower consumer prices during normal periods. However, lower than normal inventories can lead to higher or more volatile prices in the event of supply disruptions or surges in demand. The nation's petroleum product supply infrastructure is constrained in key areas and is likely to become increasingly constrained, unless timely investments are made. A constrained supply infrastructure can exacerbate price effects and price volatility due to a supply disruption. However, no central source of data tracks system bottlenecks. While there is widespread recognition that a study is needed to fully identify the extent of infrastructure inadequacy and the impact on prices, to date, no such analysis has been undertaken, though such a study was mandated by Congress in 2006 with a June 2008 deadline. Significant infrastructure expansion plans in the private sector could alleviate the stresses. However, a complex permitting and siting process involving as many as 11 federal agencies and numerous state and local stakeholders has slowed or impeded the expansion and construction of new pipelines. Unlike in the case of natural gas pipelines, no central federal agency acts to coordinate this permitting process.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: According to the Department of Transportation, over the last several years the Department has worked on this issue with other federal agencies to assess the feasibility and desirability of designating a lead federal agency, with authority to convey the power of eminent domain. Transportation has also discussed with other agencies the opportunities for increased coordination and streamlining of pipeline permitting and siting and has asked the Congress to clarify these authorities as part of its budget process. On the basis of these efforts, the Department of Transportation does not believe it is feasible to designate a lead federal agency or enhance coordination and streamlining of the permitting and siting process at this time, either in terms of the collective will of the agencies or the support from Congress.

Recommendation: In conjunction with the completion of the first comprehensive study of the supply infrastructure, the Secretary of Transportation should work with the Department of Energy, Federal Energy Regulatory Commission (FERC), EPA, and other federal agencies to evaluate the feasibility and desirability of designating a lead federal agency, with authority to convey the power of eminent domain, to coordinate across agencies and streamline the permitting and siting process for crude oil and petroleum product interstate pipeline expansions, upgrades, and new construction, using FERC's role with natural gas pipelines as a model. If this is found to be feasible and desirable, we recommend the aforementioned agencies work together to determine which agency should take the lead role and to prepare a legislative proposal for Congress to provide any additional authority needed to implement this recommendation.

Agency Affected: Department of Transportation

Status: Closed - Implemented

Comments: While conducting a comprehensive analysis of the downstream refined petroleum product market, GAO noted (in GAO-08-14) that the U.S. energy infrastructure for crude oil and petroleum products is constrained, and that it is important for pipeline and other energy infrastructure owners, policymakers and regulatory agencies to have a comprehensive analysis of the likely weaknesses in the nation's infrastructure so they may be informed as to the current state of the supply infrastructure and the areas in most critical need of investment. In December 2007, GAO recommended that the Secretaries of Energy and Transportation undertake a comprehensive study of existing and projected increases to the infrastructure system--including pipeline throughputs--to evaluate whether future demand is likely to be met by existing infrastructure and planned increases. A Department of Transportation official confirmed to us in November 2008 that the agency had completed a draft of the study in part in response to our recommendation, and expected to publish it in December 2008 or January 2009. Based in part upon our work, the Department of Transportation, working in cooperation with the Department of Energy, on January 14, 2009 published the completed comprehensive study entitled "America's Energy Pipeline Network: Assessing Current Strengths and Identifying Future Challenges." Among other things, the report identified where unplanned disruptions of pipeline capacity may cause shortages of petroleum products or price disruptions.

Recommendation: To comprehensively analyze the U.S. supply infrastructure's capacity to accept, handle, and transport the increasing volumes and types of petroleum products and biofuels expected to traverse its system, the Secretaries of Energy and Transportation should undertake the comprehensive study of existing and projected increases to the infrastructure system--including terminal capacity and pipeline throughputs--to evaluate whether future demand is likely to be met by existing infrastructure and planned increases as mandated by Congress in 2006. To the extent that the data to comprehensively conduct such analyses may at present not be collected, the Secretaries should consider evaluating the merits of enhancing the reporting of utilization and throughputs, perhaps using natural gas pipeline and storage reporting requirements as a model.

Agency Affected: Department of Energy

Status: Closed - Implemented

Comments: In March, 2008, DOE's Energy Information Administration [EIA] notified GAO that it was currently working with--and plans to continue working with--other federal agencies, the International Energy Agency, and relevant international groups to maximize the fungibility of transportation fuels and minimize the proliferation of special fuel blends--including biofuels--to meet state and locality requirements. DOE's agreement to continue to raise this issue going forward and strive for a more fungible transportation fuel slate endorses and implements the recommendation we made in GAO-08-14.

Recommendation: To avoid additional proliferation of differing fuel specifications that would further burden the existing supply infrastructure and create impediments to trade, the Secretary of Energy should coordinate with the Environmental Protection Agency (EPA) and other relevant federal agencies, states, International Energy Agency (IEA), the European Union, and other foreign entities to encourage development of biofuels and petroleum products standards and blending practices that maximize the fungibility of these fuels and minimize the spread of differing fuel types that would further strain the supply infrastructure, while recognizing that some fuel differences to reflect local environmental requirements, engine performance, or other factors are likely beneficial.

Agency Affected: Department of Energy

Status: Closed - Implemented

Comments: While conducting a comprehensive analysis of the downstream refined petroleum product market, GAO noted (in GAO-08-14) that the U.S. energy infrastructure for crude oil and petroleum products is constrained, and that it is important for pipeline and other energy infrastructure owners, policymakers and regulatory agencies to have a comprehensive analysis of the likely weaknesses in the nation's infrastructure so they may be informed as to the current state of the supply infrastructure and the areas in most critical need of investment. In December 2007, GAO recommended that the Secretaries of Energy and Transportation undertake a comprehensive study of existing and projected increases to the infrastructure system--including pipeline throughputs--to evaluate whether future demand is likely to be met by existing infrastructure and planned increases. A Department of Transportation official confirmed to us in November 2008 that the agency had completed a draft of the study in part in response to our recommendation, and expected to publish it in December 2008 or January 2009. Based in part upon our work, the Department of Transportation, working in cooperation with the Department of Energy, on January 14, 2009 published the completed comprehensive study entitled "America's Energy Pipeline Network: Assessing Current Strengths and Identifying Future Challenges." Among other things, the report identified where unplanned disruptions of pipeline capacity may cause shortages of petroleum products or price disruptions.

Recommendation: To comprehensively analyze the U.S. supply infrastructure's capacity to accept, handle, and transport the increasing volumes and types of petroleum products and biofuels expected to traverse its system, the Secretaries of Energy and Transportation should undertake the comprehensive study of existing and projected increases to the infrastructure system--including terminal capacity and pipeline throughputs--to evaluate whether future demand is likely to be met by existing infrastructure and planned increases as mandated by Congress in 2006. To the extent that the data to comprehensively conduct such analyses may at present not be collected, the Secretaries should consider evaluating the merits of enhancing the reporting of utilization and throughputs, perhaps using natural gas pipeline and storage reporting requirements as a model.